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3. Monetary Policy
Monetary policy is the process by
which the monetary authority of a
country controls the supply of money,
often targeting a rate of interest for
the purpose of promoting economic
growth and stability. The official
goals usually include relatively stable
prices and low unemployment.
4. Objectives of Monetary Policy
1. Economic Growth
2. Exchange Stability
3. Price Stability
4. Full Employment
5. Credit Control
6. Reduction in Inequalities of Income & Wealth
7. Creation & Expansion of Financial Institution
5. Economic Growth
By adopting suitable monetary policy, a govt.
tries to achieve economic development . As a
result of economic development, there will be
proper utilization of natural & human resources,
more capital formation, more employment,
increase in national & per capita income,
increase in income along with an increase in the
standard of living.
6. Exchange Stability
The traditional objective of monetary policy has
been the achievement of stable exchange rates.
Balance of payments creates fluctuations in the
foreign exchange rates.
The exchange rates, therefore, has to be adjusted
to achieve the favourable balance of payments.
7. Price Stability
Stable prices improves public confidence, promote
business activity & ensure equal distribution of
income & wealth. As a result, it will enhance the
prosperity and welfare in the community.
Credit Control
To control credit govt. uses tools like ; Bank
1. Rate Policy
2. Open Market Operation
3. Cash Reserve Ratio
8. Full Employment
To attain this objective, it is necessary to increase
production & demand. During the boom period the
position is automatically achieved as there is rapid
increase in demand and thereby production is also
increased. On the contrary , during depression there is
low production because of low demand and wide
employment . Hence, the objective of monetary
policy is to check rising unemployment during
depression period.
9. Fiscal Policy
A government policy for dealing with the budget
(especially with taxation and borrowing) .
Objectives
1. Increase in Savings :-
This policy is also used to increase the rate of
savings in the country. In the developing
countries rich class spends a lot of money on
luxuries. The government can impose taxes on
them and can provide the basic necessities of life
to the poor class on low rate. In this way by
providing incentives, savings can be increased.
10. 2. To Achieve Equal Distribution of Wealth
:-
Fiscal policy is very useful for the achievement of
equal distribution of wealth. When the wealth is
equally distributed among the various classes then
their purchasing power increases which ensures the
high level of employment and production.
3. To Control Inflation :-
Fiscal policy is very useful weapon for controlling
the rate of inflation. When the expenditure on non
productive projects is reduced or the rate of taxes are
increased then the purchasing power of the people
reduces.
11. 4.To Achieve Economic Stability:-
The aim of fiscal policy is to increase the rate of
production and employment without inflation. So in
all the countries fiscal policy major objective is to
ensure the economic stability in the country.
5. Stabilization of Price Level
Fiscal policy is also used to achieve desirable level of
prices in the country. It means the cost and price
should be at such level that production and
employment may increase.
12. For achieving above mentioned objectives Monetary
and Fiscal Policy Co-ordination Board (MFPCB) was
established in Feb 1994.
The objective was to maintain co-ordination between
the SBP and federal govt. on fiscal , monetary and
exchange rate policies.
Co-ordination Board
There shall be a Board for the co-ordination of fiscal,
monetary and exchange rate policies, here in after to
be called the Co-ordination Board.
13. Purpose of Co-ordination
If monetary policy lacks sufficient power on its own
to end deflation, the solution is not to give up but to
try a co-ordinated monetary and fiscal stimulus.
14. Structure of Co-ordination Board
(i) Federal Minister for Finance - Chairman
(ii)Federal Minister for Commerce or Secretary, Ministry of
Commerce - Member
(iii) Deputy Chairman, Planning Commission Member
(iv) The Governor - Member
(v) Secretary, Finance Division, Government of Pakistan -
Member
(v) Secretary, Finance Division, Government of Pakistan -
Member
15. Functions of Co-ordination Board
The Co-ordination Board shall :
(a) coordinate fiscal, monetary and exchange-rate
policies;
(b) ensure consistency among macro-economic
targets of growth, inflation and fiscal, monetary and
external accounts;
(c) review the level of Government borrowing in
relation to the predetermined or revised targets after
everyquarter.
16. (d) meet on a quarterly basis to review the
consistency of macro-economic policies and to
revise limits and targets set at the time of the
formulation of the budget, keeping in view the
latest developments in the economy;
(e) consider limits of the government borrowing as
revised from time to time in the meetings to be
held before and after passage of the annual
budget.
17. Things to be placed before the
board:The State Bank of Pakistan shall place before the Board :
(a) relevant data relating to monetary expansion and
Government borrowing;
(b) the assessment of the State Bank regarding the impact of
economic policies of the government on monetary aggregates
(c) The Planning Commission and the Ministry of Finance
Government of Pakistan shall, from time to time, bring to the
notice of the Board the impact of monetary policy adopted by
the State Bank or investment, growth and balance of payment.
(d) The Ministry of Commerce, Government of Pakistan shall,
from" time to time, bring to the notice of the Board the impact
of the monetary policy by the State bank on imports and
exports.
18. Benefits of Domestic Co-ordination
Most economists agree that fiscal and monetary
policies are not independent of each other and that
pursuing only one without consideration for the
other produces negative results. By coordinating
their activities, the government and the central
bank can avoid high deficit and inflation.
However, economists do not agree about the
extent to which coordination brings benefits.
Additionally, for coordination to work, appropriate
institutional mechanisms, such as monetary and
fiscal coordination boards, must be in place, and
those are not always easy to achieve.
19. Benefits of International Co-
ordination
In today's highly integrated world economy, the decisions
of one nation can affect many other nations too. For
example, a decision by a central bank to lower interest
rates in order to boost domestic economy leads to
devaluation of that country's currency, thus favoring
domestic exporters over foreign competition. Similarly,
a decision to raise interest rates in order to curb domestic
inflation makes that country's exports more expensive,
thus leading to higher inflation in other countries. If
there is no coordination, nations might respond to each
other's policy by introducing reciprocal or retaliatory
policies, which have the potential to outweigh the
benefits of uncoordinated measures.
20. Recent Example
The chairman of the U.S. Fed, Ben Bernanke, said at a
conference of central bank officials in Europe in 2008
that coordination of monetary policy had been discussed
by policymakers and academics for decades, but rarely
used. However, he said, that changed with the current
global financial crisis. For example, in 2008 the Federal
Reserve reduced its interest rate jointly with five other
major central banks. Since then, governments and
central banks have been working together more often to
coordinate their fiscal and monetary policies.